Economists at CBA, NAB call for Australia February rate hike

SYDNEY, Dec 16 (Reuters) - The Commonwealth Bank of Australia (CBAUF) and the National Australia Bank (NAUBF), two of the country's four major banks, now expect the central bank to hike interest rates in February next year as inflation picks up in a capacity-constrained economy.

"We see a rate hike as necessary to bring the economy back into balance and help return inflation back to its target," said Belinda Allen, head of Australian economics at the CBA, in a note to clients on Tuesday.

"But we don't expect a large hiking cycle, only fine-tuning by the RBA and see the cash rate sitting at 3.85% at the end of 2026."

Sally Auld, chief economist at the NAB, now also expects the Reserve Bank of Australia to raise rates by 25 basis points in February, and is tipping another hike in May to a terminal rate of 4.1%.

Taken together with the stronger growth outcomes and evidence of capacity constraints starting to build, "we believe an inflation outcome of this magnitude will force the RBA to execute a modest recalibration of monetary policy in 1H26," said Auld.

The RBA has cut interest rates three times this year to 3.6% but inflation is rearing its head again in an accelerating economy. Headline inflation climbed for four straight months to 3.8% in October, with the trimmed mean measure running at 3.3%, above the mid-point of the target band of 2%-3%.

Governor Michele Bullock has ruled out further policy easing last week after keeping rates steady, warning that the next move will be up if inflation pressures prove to be stubborn.

Swaps imply just a 25% probability of a rate hike in February, but a move in May is about 70% priced in. (Reporting by Stella Qiu Editing by Shri Navaratnam)